Are you looking for...

Related Search

Where is China in the Sentiment Cycle?

China has been headline news once again following the mini-devaluation of its currency as the government attempts to prevent its economy slowing further; volatility in financial markets has risen, but what happens now and how should investors react?

19/10/2015

Malcolm Melville

Wealth Preservation Manager

Source: Schroders. For illustrative purposes only.

China’s Sentiment Cycle

According to latest figures growth in China is slowing. Given China is the world’s second largest economy and global growth remains sluggish at best, investor uncertainty has risen and as a result markets around the globe have corrected.

As an investor, deciding on your next move can be difficult, will markets rebound or continue to fall? Is the worst over or is there more pain to come?

In times like these, crunching the numbers and looking at the economic data can be useful, but if the numbers only reflect reality it can be hard for investors to make a decision.

We are avoiding Chinese assets and other assets which are dependent on the Chinese economy.

China in “Out of Fashion” was characterised by the Tiananmen Square protest of 1989, the 1993 devaluation and the Asian crisis in 1997.

The evolution of China’s economy

Since then the economy has changed beyond recognition, as the reforms of the 1990s started to pay dividends, enabling the move into “Early Adoption”.

The strong growth between 2002 and 2007 allowed China to move through the positive sections of the Cycle.

Faith in the economy’s ability to withstand shocks was cemented with the rapid recovery following the Global Financial Crisis (GFC).

The successful navigation of a crisis is often the last event before entering “Blind Faith”. Investors started to accept Chinese growth forecasts as fact, without question.

They have forgotten it was the reforms of the 1990s that set the stage for the years of prosperity and not a new found ability to generate growth by saying “GDP will be 7%”.

Investors have yet to give up on China completely and importantly it needs to spend time in 'Out of Fashion' while the excesses are unwound.

This “Blind Faith” conditions investors to ignore the warning signs, such as the build up in credit (which generated the post-GFC recovery), until asset prices fall too much to be ignored.

Commodities were the first asset to respond to Chinese economy weakness and moved investors into the “Acknowledgement” area.

However, it was not until the stockmarket fall in mid 2015 and the mini currency devaluation of August this year that investors recognised fundamentals have changed.

Where next for China?

The stages of the Cycle are proportional to each other in time, although there is no exact relationship.

China took 10 years to move from “Out of Fashion” to “New Paradigm” and has since taken seven years to reach “Acceptance”.

Investors have yet to give up on China completely and importantly it needs to spend time in “Out of Fashion” while the excesses are unwound.

We are avoiding Chinese assets and other assets which are dependent on the Chinese economy.

This can be achieved quickly with bankruptcies and reform, or much more slowly by propping up failing institutions with endless supplies of new credit.

The latter is less harmful in the short-term and is probably more politically acceptable but will be painfully slow. Whichever route is chosen, from a sentiment perspective, China is not out of the woods yet.

We have downgraded most of the BRIC economies as idiosyncratic stories deteriorate. China escapes unscathed, with a slowdown still expected later this year after a strong first quarter, as tighter policy bites.

Schroder Investment Management (Switzerland) AG (herein after called "SIMSAG") webpages are aimed exclusively at qualified investors with their registered office or residence in Switzerland. The SIMSAG webpage also contains information about collective investment schemes which are not approved for distribution to non-qualified investors in Switzerland.

Target group for fund distribution

Target group for fund distribution

Schroder Investment Management (Switzerland) AG (herein after called "SIMSAG") webpages are aimed exclusively at qualified investors with their registered office or residence in Switzerland. The SIMSAG webpage also contains information about collective investment schemes which are not approved for distribution to non-qualified investors in Switzerland.

QUALIFIED INVESTORS WITH REGISTERED OFFICE OR RESIDENCE OUTSIDE OF SWITZERLAND MUST NOT ACCESS SIMSAG WEBPAGES AND/OR USE THE INFORMATION CONTAINED THEREIN AS THIS MAY DEPEND UPON A DISTRIBUTION LICENSE OF THE CORRESPONDING COUNTRY. INVESTORS DOMICILED OUTSIDE SWITZERLAND ARE REFERRED TO WWW.SCHRODERS.COM.

IN PARTICULAR, INFORMATION REGARDING THE FUNDS IS NOT INTENDED FOR PERSONS IN THE USA OR PERSONS WITH US NATIONALITY OUTSIDE THE USA.

Information and no subscription solicitationDetails of the funds on SIMSAG webpages solely serve to provide information about the products. They do not constitute solicitation for subscription to shares in a fund. You should only subscribe to shares in a fund after reading the fund agreement and/or the latest prospectus, the latest audited annual report and if need be the subsequent unaudited semi-annual report as well as additional relevant documentation according to local laws. The fund agreement, the prospectus and the simplified prospectus (if applicable) as well as the annual and semi-annual report can be obtained, free of charge, from the fund management company Schroder Investment Management (Switzerland) AG, Central 2, CH-8001 Zurich. Schroder Investment Management (Switzerland) AG also acts as the Swiss representative for foreign funds. The paying agent for the foreign funds is Schroder & Co. Bank AG.

The funds are not suitable for all investors. We therefore recommend that you contact an independent financial advisor in order to determine whether investment in shares in a particular fund corresponds to your specific requirements and preferred level of risk.

Information on SIMSAG webpages do not constitute financial, legal or tax advice. You must contact a specialist for this type of information. In particular, we recommend that you consult a tax consultant for information about applicable tax laws.

No guarantee and no liabilityNo guarantee or assurance is given regarding the actuality, accuracy or completeness of fund information. This is the case even though all information on SIMSAG webpages are based on sources which we consider to be reliable and have selected carefully.

All expressions of opinion, valuations or prognoses, in particular in relation to future events or the future performance of a managed fund, originate from the corresponding author and are based on the interpretation of information available at the time. They do not necessarily correspond with the opinion of SIMSAG.

Information on SIMSAG webpages may be changed at any time without notification. Date-marked information is exclusively published for the corresponding date. There is no obligation on our part to update this information.

SCHRODER INVESTMENT MANAGEMENT (SWITZERLAND) AG, INCLUSIVE OF ITS ADVISORY BOARDS, REPRESENTATIVES, EMPLOYEES, CONTRACTORS AND CONTRACTUAL PARTNERS IS EXEMPT, TO THE MAXIMUM EXTENT POSSIBLE, FROM ANY LIABILITY FOR LOSSES OR DAMAGES WHICH ARE DIRECTLY OR INDIRECTLY CONNECTED WITH INFORMATION REGARDING FUNDS NOT BEING CURRENT, CORRECT OR COMPLETE OR WITH ACCESS TO SIMSAG WEBPAGES BEING TEMPORARILY INTERRUPTED. FURTHERMORE, LIABILITY IS EXCLUDED TO THE MAXIMUM EXTENT POSSIBLE FOR THE FOLLOWING DAMAGES: LOSS OF PROFIT; DAMAGES AS A RESULT OF A BUSINESS INTERRUPTION; FUTILE EXPENDITURE OF TIME; INDIRECT DAMAGES AND/OR CONSEQUENTIAL DAMAGES, EVEN IN THE CASE THAT THE POSSIBILITY OF DAMAGE WAS POINTED OUT OR FORESEEABLE.

Investment risksInvestors must appreciate that, as with all funds, the funds on SIMSAG webpages entail risks, including a possible loss of the invested capital. Past performance or potential profits cannot be taken as a guide to future performance or potential profits. Good past performance may not be repeated in the future. The performance indicated does not take into account commissions and costs. The price of shares in a fund and the income from them may fluctuate. Consequently, upon redemption, the shares belonging to an investor may be worth more or less than the original cost price. Please read the risk information in the fund agreement, prospectus or simplified prospectus (if applicable) for each fund. These documents can be obtained, free of charge, from Schroder Investment Management (Switzerland) AG, Central 2, CH-8001 Zurich.

ConfirmationBy clicking on "I agree", you are confirming that you have read and understood this disclaimer as well as that you are a qualified investor as defined in Article 10 para. 3 lit. c, d, and 3bis of the Collective Investment Schemes Act, CISA, having its registered office or residence in Switzerland and that you are therefore entitled to gain access to the fund information on SIMSAG webpages. Clicking on "I disagree" will automatically disconnect you from the SIMSAG webpage.